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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange as
of 1934 for the fiscal year ended December 31, 1996
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 33-77324
REPUBLIC BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0862051
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 West Market Street, Louisville, Kentucky 40202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 584-3600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
None None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 21, 1997, the estimated aggregate market value of the shares of the
Registrant's Class A Common Stock and Class B Common Stock held by
non-affiliates of the Registrant was approximately $13,732,000 and $2,436,000,
respectively, (based on a $7.48 and $7.48 book value per share, respectively).
As of March 14, 1997, Registrant had outstanding 6,051,611 shares of Class A
Common Stock and 1,170,907 shares of Class B Common Stock.
This report consists of 70 consecutively numbered pages. An index to the
exhibits to this report appears on page 61.
TABLE OF CONTENTS
Page
Item
PART I
1. Business 3
2. Properties 5
3. Legal Proceedings 6
4. Submission of Matters to a Vote of Security Holders 6
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters 6
6. Selected Consolidated Financial Data 7
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
8. Financial Statements and Supplementary Data 24
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 52
PART III
10. Directors and Executive Officers of the Registrant 53
11. Executive Compensation 55
12. Security Ownership of Certain Beneficial Owners
and Management 58
13. Certain Relationships and Related Transactions 58
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 60
PART I
ITEM 1. BUSINESS
General Business Overview
Republic Bancorp, Inc. ("Republic"), headquartered in Louisville, Kentucky, is a
bank holding company for its subsidiary Republic Bank & Trust Company (the
"Bank"). The Bank is a commercial banking and trust corporation organized and
chartered under the laws of the Commonwealth of Kentucky. Republic was
incorporated in Kentucky on January 2, 1974, as a bank holding company under the
Bank Holding Company (BHC) Act of 1956, as amended. Republic's principal
business, through its wholly owned subsidiary, provides banking services to
individuals and businesses located principally within the Commonwealth of
Kentucky. These banking services are offered through the Bank's twenty one
banking centers located in eleven cities in the North Central, Central and
Western regions of Kentucky. The Bank's lending activities include loans secured
by residential and commercial properties, as well as the origination of general
business and consumer loans. The primary regulator for Republic is the Board of
Governors of the Federal Reserve System. The regulators for the Bank include
both the Federal Deposit Insurance Corporation (FDIC) and the Commonwealth of
Kentucky Department of Financial Institutions.
Description of Business
Republic primarily conducts business through its subsidiary, the Bank. The
Bank's principal business activities include the acceptance of deposits for
checking, savings and time deposit accounts and the origination of secured and
unsecured loans. The Bank also engages in certain mortgage banking activities,
and on a limited basis, provides trust services to its customers. The Bank's
lending services include the origination of commercial, business, and consumer
loans. Operating revenues are derived primarily from interest and fees earned
from the Bank's loan portfolio, and interest on securities of the United States
Government and agencies, states, and municipalities. The Bank also markets its
unsecured consumer loan products through its banking center network and through
direct mail delivery channels. The Bank's direct mail program extends to markets
outside Kentucky. The Bank is not dependent upon a single customer, or a few
customers, the loss of any one or more of which would have a material adverse
effect on the Bank's business.
Within the Commonwealth of Kentucky, the Bank has identified three predominant
market areas comprised of the North Central market, the Central Kentucky market
and the Western Kentucky market. The North Central market includes Louisville,
the largest city in Kentucky. The Bank's principal office and seven of its
banking centers are located in Louisville. The Bank's Central Kentucky market
includes the cities of Shelbyville, Frankfort, Lexington, Elizabethtown, and
Bowling Green. The Bank's Western Kentucky market is comprised of the cities of
Owensboro, Mayfield, Paducah, Benton and Murray.
Competition
The Bank actively competes with several local and regional commercial banks for
deposits, loans and other banking related financial services. There is strong
competition in the Bank's markets from other financial institutions as well as
other "non-bank" companies which engage in similar activities. Some of the
Bank's competition are not subject to the degree of regulatory review and
restrictions which apply to the Bank. In addition, the Bank must compete with
much larger financial institutions which, while predominantly headquartered in
other states, aggressively compete for market share in Kentucky. These
competitors attempt to gain market share through their financial products mix,
pricing strategies and banking center locations. Legislative developments
related to interstate branching and banking in general, by providing large
banking institutions easier access to a broader marketplace, are creating more
pressure on smaller financial institutions to consolidate. The Bank also
competes with insurance companies, savings banks, consumer finance companies,
investment banking firms, brokerage houses, mutual fund managers, investment
advisors and credit unions. Retail establishments compete for loans by offering
credit cards and retail installment contracts for the purchase of goods and
merchandise. It is anticipated that competition from both bank and "non-bank"
entities will continue to grow in the near future. In addition, Kentucky banks
will be permitted to merge with out of state banks effective June 1, 1997,
subject to certain conditions.
Governmental Policy and Regulation
Republic and the Bank are subject to the policies of various regulatory
authorities. In particular, bank holding companies and their subsidiaries are
affected by the credit and monetary policies of the Federal Reserve Board and
their activities are regulated under the Bank Holding Company Act. An important
function of the Federal Reserve Board is to regulate the national supply of bank
credit. Among the instruments of monetary policy used by the Federal Reserve
Board to implement its objectives include changes in the discount rate on bank
borrowings and changes in reserve requirements on bank deposits. These policies
have a significant effect on the operating results of financial institutions. It
is not possible to predict the nature or timing of future changes in monetary
and fiscal policies, or the effect such policies may have on the Bank's future
earnings. Republic and the Bank are subject to numerous federal and state laws
and regulations affecting their business and also must undergo periodic
examination by federal and state financial institution examiners. The earnings
of the Bank, and therefore the earnings of Republic, are affected not only by
the laws and regulations applicable to the banking business, but also by the
policies and interpretations of regulatory authorities.
Business Segments
The Bank engages in traditional commercial banking activities which include
commercial, business, and consumer lending, as well as, the offering of deposit
products. It is also engaged in trust, insurance, item processing, and other
related financial institution lines of business.
The Bank also conducts a mortgage banking operation as part of its core business
activities. The primary function of the mortgage banking division is the
origination, sale and servicing of single-family mortgage loans. These loans are
originated by salaried employees and commissioned originators. The majority of
loans are processed in accordance with secondary market underwriting guidelines.
Typically, adjustable rate loans and other loans which do not precisely meet
secondary market guidelines are held in the Bank's portfolio. Once closed, the
secondary market loans are packaged into similar groups and sold principally to
FNMA, FHLMC and other institutional investors. Substantially all fixed rate
loans in process are covered by forward commitments to these investors which
limits the Bank's interest rate risk.
The Bank does not retain the servicing on the majority of its loans sold in the
secondary market. When administering loans with the servicing retained by the
Bank, the responsibility of collecting principal and interest payments,
escrowing for taxes and insurance, and remitting payments to the secondary
market investors remains with the Bank. A fee is received by the Bank for
performing these standard servicing functions. It is the general policy of the
Bank to sell its secondary market loans without recourse.
Employee Relations
As of December 31, 1996, the Bank had 450 employees of which 387 were full-time
and 63 part-time. The Bank currently maintains an employee benefit program
providing, among other benefits, a managed health care program, a 401(k)
retirement plan and life insurance. These employee benefits, as a whole, are
considered by management to be generally competitive with employee benefits
provided by other employers in Kentucky. The Bank believes its future success
will depend, in part, on its ability to continue to attract and retain highly
skilled retail, technical, and managerial personnel in order to maintain its
quality delivery of banking services. None of the Bank's employees are subject
to a collective bargaining agreement, and neither Republic nor the Bank have
ever experienced a work stoppage. The Bank's employee relations are deemed by
management to be satisfactory.
ITEM 2. PROPERTIES
Republic's executive offices and principal support and operational functions are
located at 601 West Market Street in Louisville, Kentucky. All of Republic's
banking centers are located in Kentucky. The location of the twenty one banking
centers, their respective approximate square footage and their form of occupancy
is described in the following table:
Square Owned (O)/
Banking Centers Footage Leased (L)
NORTH CENTRAL MARKET
601 West Market Street, Louisville 43,000 L
2801 Bardstown Road, Louisville 5,000 L
661 South Hurstbourne Parkway, Louisville 14,000 L
4921 Old Brownsboro Road, Louisville 2,000 L
5320 Dixie Highway, Louisville 5,000 O
4655 Outer Loop, Louisville 3,000 L
3950 Kresge Way, Louisville 300 L
CENTRAL KENTUCKY MARKET
1641 Midland Trail, Shelbyville 5,000 O
100 Highway 676, Frankfort 4,000 O
1001 Versailles Road, Frankfort 4,000 O
651 Perimeter Drive, Lexington 4,000 L
2401 Harrodsburg Road, Lexington 4,000 O
380 West Main Street, Lexington 750 L
502 West Dixie Avenue, Elizabethtown 4,000 O
1700 Scottsville Road, Bowling Green 2,000 O
WESTERN KENTUCKY MARKET
3500 Frederica Street, Owensboro 5,000 O
408 East Broadway, Mayfield 6,000 O
507 Main Street, Benton 4,000 O
1201 Main Street, Murray 2,000 O
2701 Lone Oak, Paducah 5,000 O
1601 Broadway, Paducah 10,000 O
During 1996, the West Market Street, Bardstown Road and South Hurstbourne
Parkway locations, were leased from an affiliated person. (See details regarding
these leases in Item 13, "Certain Relationships and Related Transactions").
Neither the location of any particular office nor the term of any lease is
deemed material to the business of the Bank.
There are no known environmental issues of a negative nature affecting the owned
or leased properties of the Bank.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of operations, Republic and the Bank are defendants in
various legal proceedings. In the opinion of management, there is no proceeding
pending or, to the knowledge of management, threatened in which an adverse
decision could result in a material adverse change in the business or
consolidated financial position of Republic and the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Pursuant to an amendment to its Articles of Incorporation effective February 20,
1996, Republic's existing Common Stock was reclassified as Class B Common Stock
and a new class of Common Stock was created and designated as Class A Common
Stock (see Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations- Capital"). Neither class of Republic's Common Stock
have an established public trading market. There were only a limited number of
trading transactions in Republic's Common Stock during 1996 to the knowledge of
Republic.
As of March 14, 1997, Republic had approximately 418 holders of the Class A
Common Stock and 356 holders of the Class B Common Stock. During 1996 and 1995,
Republic declared and paid the following quarterly dividends per share on its
Common Stock:
1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
Class A Common Stock $.055 $.055 $.055 $.055
Class B Common Stock $.050 $.050 $.050 $.050
1995
First Second Third Fourth
Quarter Quarter Quarter Quarter
Common Stock $.25 $.25 $.25 $.25
Republic's dividend paying policy takes into account a number of factors, based
on available information. These factors include the performance of the Bank, its
dividend paying ability and regulatory considerations. Republic presently
anticipates that comparable cash dividends (adjusted for the reclassification of
the Common Stock and any additional stock splits or other similar transactions)
will continue to be paid in the future.
The Class A Common Stock was created pursuant to an amendment to Republic's
Articles of Incorporation, effective February 20, 1996 (the "Amendment"), which
reclassified Republic's Common Stock as Class B Common Stock. By an amendment to
the Articles of Incorporation of Republic, each share of the outstanding common
stock of Republic was automatically exchanged for the same number of shares of
the Class B Common Stock of Republic effective February 20, 1996. A total of
1,203,578 shares of Class B Common Stock were outstanding by virtue of such
amendment.
On February 29, 1996, a total of 6,017,890 shares of Class A Common Stock were
distributed as a dividend to the Company's common shareholders of record on
February 20, 1996, at the rate of 5 shares of Class A Common Stock for each
share of Class B Common Stock.
No consideration was received by Republic in connection with the issuance of
shares of Class A Common Stock and Class B Common Stock, as described above, and
Republic does not admit that such issuance involved a "sale" of securities for
the purpose of the Securities Act of 1933. To the extent the issuance is deemed
to be a sale, under Rule 145 of the Securities Act of 1933, the sale was exempt
under Section 3(a)(9) of that Act. The securities were issued in exchange by
Republic with its existing shareholders exclusively, and no commission or other
remuneration was paid or given, directly or indirectly, for soliciting such
exchange.
The Class B Common Stock is convertible into Class A Common Stock, at the rate
of one share of Class A Common Stock for each share of Class B Common Stock, in
accordance with the procedures set out in the Articles of Incorporation.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth Republic's selected historical financial
information from 1992 through 1996. This information should be read in
conjunction with the Consolidated Financial Statements of Republic and the
related Notes. Factors affecting the comparability of certain indicated periods
are discussed in Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Year Ended December 31,
(in thousands)
1996 1995 1994 1993 1992
INCOME STATEMENT DATA:
Interest Income $81,986 $71,133 $47,375 $43,377 $46,333
Interest Expense 43,855 37,720 22,513 21,119 25,728
Net Interest Income 38,131 33,413 24,862 22,258 20,605
Provision for Loan
Losses 9,149 4,268 537 391 244
Non-Interest Income 7,097 7,520 6,997 8,154 6,487
Non-Interest Expense 31,409 24,505 22,216 22,199 19,880
Income Before Taxes 4,670 12,160 9,106 7,822 6,968
Net Income 2,727 7,788 6,170 5,864 6,078
BALANCE SHEET DATA:
Total Assets $1,140,882 $891,347 $736,009 $646,697 $603,831
Total Loans, Net of
Unearned Income
and Allowance for Loan
Losses 759,424 668,193 571,950 516,414 479,244
Allowance for Loan
Losses 6,241 3,695 1,827 1,627 1,622
Total Deposits 783,141 734,443 590,036 516,871 472,712
Repurchase Agreements
and Other
Short-Term Borrowings 181,634 21,729 12,732 13,228 30,091
Other Borrowed Funds 106,974 68,063 77,060 67,721 60,751
Total Stockholders'
Equity 59,019 58,502 47,045 40,669 34,384
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Republic reported earnings of $2.7 million in 1996, a decrease from $7.8 million
reported in 1995. During 1996, Republic maintained its quarterly dividend
payments to shareholders. The decrease in earnings was primarily attributable to
additional charge-offs in Republic's consumer loan portfolio, increased reserves
for loan losses, a one-time charge of $2.3 million due to the federally mandated
one-time assessment on the Bank's SAIF deposits, and additional expense
associated with an aggressive expansion strategy during 1996 resulting in
opening five additional banking centers. The expansion activity during 1996
provided Republic with additional growth opportunities in its markets.
Assets continued to grow at a record pace during 1996, increasing 28% to $1.1
billion in total assets. Loans increased 14% in 1996 due to management's focus
on its core business, residential lending. The asset growth was funded by
increases in core deposits supplemented by borrowings.
Year Ended December 31,
------------------------------------------
1996 1995 1994 1993 1992
Net income ($000's) $2,727 $7,788 $6,170 $5,864 $6,078
Net income per share $.30 $.99 $.86 $.84 $.88
Return on assets .29% 0.95% 0.93% 0.92% 1.01%
Return on equity 4.57% 14.46% 13.71% 14.10% 16.79%
Average Equity to 6.30% 6.56% 6.65% 5.95% 5.26%
Average Assets
Dividend Payout Ratio 68% 16% -- -- --
Cash Dividends Per
Common Share:
Class A Common Share $0.22 -- -- -- --
Class B Common Share $0.20 -- -- -- --
Common Shares -- $1.00 -- -- --
Republic has made, and may continue to make, various forward- looking statements
with respect to credit quality (including delinquency trends and the Allowance
for Loan Losses), corporate objectives and other financial and business matters.
Republic cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, all of which may change over time. Actual
results could differ materially from forward-looking statements.
In addition to factors disclosed by Republic, the following factors, among
others, could cause actual results to differ materially from such
forward-looking statements: pricing pressures on loan and deposit products;
competition; changes in economic conditions both nationally and in the Bank's
markets; the extent and timing of actions of the Federal Reserve Board;
customers' acceptance of the Bank's products and services; and the extent and
timing of legislative and regulatory actions and reforms.
RESULTS OF OPERATIONS
Net Interest Income
The principal source of Republic's revenue is net interest income. Net interest
income is the difference between interest income on interest-earning assets such
as loans and securities and the interest expense on liabilities used to fund
those assets, such as interest-bearing deposits and borrowings. Net interest
income is impacted by both changes in the amount and composition of
interest-earning assets and interest-bearing liabilities and the level of
interest rates. The change in net interest income is typically measured by net
interest spread and net interest margin. Net interest spread is the difference
between the average yield on interest earning assets and the average cost of
interest bearing liabilities. Net interest margin is determined by dividing net
interest income by average interest-earning assets.
Table 1 on page 10 provides detailed information as to average balances,
interest income/expense, and rates by major balance sheet category for fiscal
years 1994 through 1996. Table 2 on page 11 provides an analysis of the changes
in net interest income attributable to changes in rates and changes in volume of
interest-earning assets and interest-bearing liabilities. Table 1 - Average
Balance Sheet Rates - for December 31, 1996, 1995 and 1994 (dollars in
thousands)
1996 1995 1994
----------------------------- ---------------------------- ----------------------------
ASSETS Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Earning Assets:
U.S.Treasury
and U.S. Government
Agency Securities $147,376 $9,040 6.13% $115,897 $7,469 6.44% $84,728 $3,808 4.49%
State and Political
Subdivision Securities 4,557 390 8.56% 4,689 407 8.68% 4,741 405 8.54%
Other Investments 5,303 413 7.79% 5,055 342 6.77% 4,585 264 5.76%
Mortgage-Backed
Securities 705 36 5.11% 796 40 5.03% 924 34 3.68%
Federal Funds Sold 23,847 1,276 5.35% 26,144 1,537 5.88% 13,014 494 3.80%
Total Loans and Fees 724,669 70,831 9.77% 632,775 61,338 9.69% 519,658 42,370 8.15%
-------- ------- -------- ------- -------- -------
Total Earning Assets 906,457 81,986 9.04% 785,356 71,133 9.06% 627,650 47,375 7.55%
Less: Allowance for
Loan Losses (6,196) (2,795) (1,687)
Non-Earning
Assets:
Cash and Due From
Banks 20,830 16,597 21,792
Bank Premises and
Equipment, Net 14,391 11,284 10,873
Other Assets 10,974 11,195 6,924
-------- -------- --------
Total Assets $946,456 $821,637 $665,552
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest Bearing
Liabilities:
Transaction Accounts $84,706 $2,308 2.72% $81,783 $2,448 2.99% $78,243 $1,933 2.47%
Money Market Accounts 35,557 1,622 4.56% 18,999 892 4.69% 10,878 275 2.53%
Individual Retirement
Accounts 34,956 2,156 6.17% 31,089 1,949 6.27% 19,571 981 5.01%
Certificates of Deposits
and Other Time
Deposits 515,436 29,998 5.82% 475,750 27,223 5.72% 360,684 15,406 4.27%
Repurchase Agreements
and Other Borrowings 148,026 7,771 5.25% 91,952 5,208 5.66% 86,380 3,918 4.54%
-------- ------- -------- ------- -------- -------
Total Interest
Bearing Liabilities 818,681 43,855 5.36% 699,573 37,720 5.39% 555,756 22,513 4.05%
Non-Interest
Bearing Liabilities:
Non-Interest Bearing 57,041 54,540 50,826
Deposits
Other Liabilities 11,090 13,657 13,955
Stockholders' Equity 59,644 53,867 45,015
-------- -------- --------
Total Liabilities and
Stockholders' Equity $946,456 $821,637 $665,552
======== ======== ========
Net Interest Income $38,131 $33,413 $24,862
======= ======= =======
Net Interest Spread 3.68% 3.67% 3.50%
==== ==== ====
Net Interest Margin 4.21% 4.25% 3.96%
==== ==== ====
- --------------------------------------------------------------------------------
Calculations include non-accruing loans in the average loan amounts outstanding.
The following table presents the extent to which changes in interest rates and
changes in the volume of interest earning assets and interest bearing
liabilities affected Republic's interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (i)
changes attributable to changes in volume (changes in volume multiplied by prior
rate), (ii) changes attributable to changes in rate (changes in rate multiplied
by old volume), and (iii) the net change. The changes attributable to the
combined impact of volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.
Table 2 - Volume/Rate Variance Analysis (in thousands)
Year Ended December 31, 1996 Year Ended December 31, 1995
compared to compared to
Year Ended December 31, 1995 Year Ended December 31, 1994
---------------------------- ----------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
due to due to
Total Total
Net Net
Change Volume Rate Change Volume Rate
INTEREST INCOME (1):
U.S. Treasury and Government
Agency Securities $1,571 $2,029 ($458) $3,661 $1,401 $2,260
State and Political
Subdivision Securities (17) (11) (6) 2 (4) 6
Other Investments 71 17 54 78 27 51
Mortgage-Backed Securities (4) (5) 1 6 (5) 11
Federal Funds Sold (261) (135) (126) 1,043 495 548
Total Loans and Fees (2) 9,493 8,908 585 18,968 9,223 9,745
------ ------ ----- ------ ------ ------
NET CHANGE IN
INTEREST INCOME 10,853 10,803 50 23,758 11,137 12,621
------ ------ ----- ------ ------ ------
INTEREST EXPENSE:
Interest Bearing Transaction
Accounts (140) 87 (227) 515 87 428
Money Market Accounts 730 777 (47) 617 205 412
Individual Retirement Accounts 207 242 (35) 968 577 391
Certificates of Deposit and
Other Time Deposits 2,775 2,271 504 11,817 4,915 6,902
Repurchase Agreements and
Other Borrowings 2,563 3,176 (613) 1,290 254 1,036
------ ------ ------ ------- ------ ------
NET CHANGE IN
INTEREST EXPENSE 6,135 6,553 (418) 15,207 6,038 9,169
------ ------ ------ ------- ------ ------
INCREASE IN NET
INTEREST INCOME $4,718 $4,250 $468 $8,551 $5,099 $3,452
====== ====== ===== ====== ====== ======
(1) Interest for loans on non-accrual status has been excluded from Interest
Income.
(2) The amount of fees in interest on loans was $520, $139, and $475 for
the years ended December 31, 1996, 1995, and 1994, respectively.
Net interest income increased 14.1% in 1996, following a 34.4% increase in 1995.
The increase in 1996 is attributable to Republic's loan growth, particularly
residential lending (see "Loan Portfolio" for discussion on increase in loan
volume). The increase in 1995 was due to substantial growth in the unsecured
consumer loan portfolio which favorably impacted the Bank's spread.
Average interest-earning assets increased 15.4% in 1996, compared to a 25.1%
increase in 1995. The 1996 and 1995 growth resulted from increased loan volume
supported by an increase in investment securities.
During 1996, average interest-bearing liabilities grew $119.1 million to $818.7
million, an increase of 17% over 1995. Certificates of deposit increased as a
result of continued competitive pricing and additional advertising. Republic's
asset growth was also funded by an increase in overnight repurchase agreements
(see discussion on "Short-Term Borrowings"). The Bank did not acquire any
brokered deposits during 1996. In 1995, average interest-bearing liabilities
grew 26% over 1994. The increase was primarily in certificates of deposit and
other time deposits which rose $115 million. Brokered deposits represented $48
million of Republic's increase in other time deposits during 1995.
Republic's net interest margin was 4.21% in 1996, 4.25% in 1995 and 3.96% in
1994. Net interest margin, net interest spread, average rate on earning assets,
and average yield on costing liabilities were all substantially unchanged when
comparing 1996 to 1995. The largest change in any one of these four categories
was 4 basis points. This change occurred because loan growth, which occurred
ratably during the year, was funded through deposit growth and other traditional
financing sources. The increase in securities sold under agreements to
repurchase and other borrowed funds occurred late in the year.
Republic's increasing leverage from 1994 through 1996 has put some downward
pressure on the net interest margin. Interest- bearing liabilities were 86% of
total assets in 1996, compared to 85% and 84% in 1995 and 1994. As a result, a
higher portion of Republic's assets are financed with interest-bearing
liabilities rather than with equity. Equity financing does not result in a
charge to earnings in the income statement. This increased leverage is the
primary reason that Republic's net interest margin decreased 4 basis points from
1995 to 1996 while the net interest spread increased 1 basis point.
Non-Interest Income
Table 3 illustrates Republic's primary sources of non-interest income.
Non-interest income decreased 5.6% to $7.1 million in 1996, compared to $7.5
million in 1995 and $7.0 million in 1994.
Table 3 - Analysis of Non-Interest Income
Percent
Increase
Year Ended December 31, (Decrease)
------------------------------ ----------------------
(dollars in thousands) 1996 1995 1994 1996/95 1995/94
Service charges on deposit accounts $2,642 $1,974 $1,473 33.8% 34.0%
Other service charges and fees 445 1,434 782 (69.0%) 83.4%
Bank card services 1,010 1,263 819 (20.0%) 54.2%
Net gain on sale of loans 1,212 1,083 1,625 11.9% (33.4%)
Loan servicing income 829 895 915 (7.4%) (2.2%)
Other 959 871 1,383 10.1% (37.0%)
------ ------ ------
Total $7,097 $7,520 $6,997 (5.6%) 7.5%
====== ====== ======
Service charges on deposit accounts increased during 1996 as a result of a rise
in the number of transaction accounts. Management also restructured its fee
schedule and reduced the level of fee waivers. The 1995 increase in service
charges was primarily attributable to growth in the number of transaction
accounts. Other service charges and fees, having shown a strong increase in 1995
over 1994, experienced a 69.0% decrease in 1996. The decline was a result of
decreased credit life insurance commissions earned as Republic slowed its
unsecured consumer loan originations. The decline in Bank card fees from 1995 to
1996 resulted from eliminating the annual fees on Republic's Bank card accounts.
The increased Bank card fees in 1995 were due to increased transaction volume.
This increase was also the result of an agreement with another financial
institution. This agreement allowed for equal sharing of revenues and expenses
and also provided additional servicing fees to Republic. Other non-interest
income increased moderately in 1996 compared to 1995. In 1994, other
non-interest income included a non-recurring payment from an affiliate pursuant
to an agreement with one of the Bank's former regulatory agencies.
Revenue from mortgage banking activities from 1994 through 1996 has been
influenced by changes in origination and sales volume and the sale of most loans
with servicing released. Proceeds from sales of loans were $104 million, $87
million, and $143 million in 1996, 1995, and 1994, respectively. Secondary
market residential loan originations are heavily influenced by interest rates,
which were primarily responsible for the changes in volume. Net gains from sales
of loans closely follow sales volume. Net gains as a percentage of loans sold
were 1.16%, 1.25%, and 1.14% in 1996, 1995, and 1994, respectively. Management
made the change from selling loans with servicing retained to servicing released
in 1995 to offset downward pressure on loan sale prices and maintain these
percentages. However, the sale of most loans servicing released has resulted in
a decline in the loan servicing portfolio and a related decline in loan
servicing income.
Non-Interest Expense
As indicated in Table 4, total non-interest expense increased by 28% to $31.4
million in 1996, compared to $24.5 million in 1995 and $22.2 million in 1994.
The increase in non-interest expense is primarily attributable to the addition
of five new banking centers. Also during 1996, Republic paid a one-time FDIC
assessment of $2.3 million with respect to the deposits of the Bank insured in
the FDIC's Savings Association Insurance Fund (SAIF). Without this charge
Republic's non-interest expense would have only increased by 19%. Non-interest
expense levels are often measured using a non-interest expense ratio
(non-interest expense divided by the sum of net interest income and non-interest
income). Republic's non-interest expense ratio was 69% (64% exclusive of
one-time SAIF Assessment) in 1996 compared to 60% in 1995 and 70% in 1994.
Republic's expansion during 1996 and continued technology enhancements will
result in increased non-interest expense during 1997. Management does not
anticipate the opening of new banking centers in 1997 at the rate achieved
during 1996
Table 4 - Analysis of Non-Interest Expense
Percent
Year Ended December 31, Increase/(Decrease)
------------------------------------ -------------------
(dollars in thousands) 1996 1995 1994 1996/95 1995/94
Salaries and employee benefits $13,236 $11,334 $10,233 16.8% 10.8%
Occupancy and equipment 6,623 5,346 4,758 23.9% 12.4%
Communication and transportation 1,548 1,407 1,126 10.0% 25.0%
Marketing and development 1,620 1,308 896 23.9% 46.0%
FDIC Insurance 3,277 1,245 1,336 163.2% (6.8%)
Supplies 973 883 702 10.2% 25.8%
Litigation recovery (738)
Other 4,132 3,720 3,165 11.1% 17.5%
------- ------- -------
Total $31,409 $24,505 $22,216 28.2% 10.3%
======= ======= =======
Salary and employee benefits expense increased approximately 16.8% and 10.8% in
1996 and 1995, respectively. This expense item comprised 42.1% of the total
operating expenses in 1996, compared to 46.3% in 1995. Republic increased
staffing levels in 1996 to 419 full-time equivalent employees (FTE's) compared
to 361 FTE's in 1995 and 342 FTE's in 1994. The increase was primarily due to
additional staffing requirements at the five new banking centers. Average
earning assets per employee increased to $2.3 million in 1996 compared to $2.2
million in 1995 and $1.8 million in 1994.
Occupancy and equipment expenses rose 23.9% in 1996 and 12.4% in 1995. The 1996
increases were primarily due to depreciation and equipment maintenance expenses
associated with new enhancements to loan and customer support systems. The $1.3
million increase in 1996 also reflects the addition of five new banking centers.
Republic's expansion during 1996 and continued technology enhancements will
result in increased non-interest expense during 1997.
Communication and transportation expenses increased 10.0% in 1996 and 25.0% in
1995. The 1996 increase was primarily a result of the five additional banking
centers. Republic also incurred additional costs associated with
telecommunication enhancements which are also expected to continue in 1997.
Increases during 1995 resulted from additional mailing costs incurred for
Republic's unsecured consumer loan programs.
Marketing and development expense rose 23.9% in 1996, following a 46.0% increase
in 1995. The increases in 1996 and 1995 primarily resulted from advertising and
promotional expenditures incurred for Republic's unsecured consumer loan
products and deposit gathering initiatives. Marketing expenses can fluctuate
from period to period based upon the timing and scope of various management
initiatives.
Insurance expense increased $2 million from 1995 to 1996. This increase is
principally a result of the federally mandated one-time assessment on the Bank's
SAIF deposits in the amount of $2.3 million. Approximately 45% of the Bank's
deposits are insured by the FDIC's Bank Insurance Fund (BIF). The remaining 55%
are insured by the FDIC's Savings Association Insurance Fund (SAIF) resulting
from the Bank's merger with Republic Savings Bank, F.S.B.. The recent federal
legislation which mandated the one-time assessment provided for a future ongoing
reduction in the FDIC's insurance rate premiums on SAIF insured deposits. Such
legislation could increase the Bank's BIF deposit assessment in the future.
Management anticipates that Republic will ultimately benefit from the charge
attributable to the one-time SAIF assessment through a reduction of the FDIC's
overall insurance rate premiums from their previous levels.
Republic expensed $738,000 in 1993 as a result of an adverse legal verdict. The
legal verdict was subsequently overturned in 1995 by a federal appellate court.
This previously expensed judgment was reversed in 1995 which had a favorable
impact on total non-interest expense. All other operating expenses during 1996,
1995 and 1994 experienced minor increases.
Republic is required to reimburse the FDIC for tax benefits received resulting
from tax deductions for losses on loans and OREO acquired through the
acquisition of a failed institution. In the third quarter of 1995, Republic was
notified by the FDIC that, under its interpretation of the agreement, Republic
may be required to remit additional payments related to prior years. Management
intends to vigorously contest any request by the FDIC for additional payments.
There have been no new developments with respect to this matter during 1996.
FINANCIAL CONDITION
Loan Portfolio
Republic experienced strong loan growth throughout its markets in 1996. Loans
increased 14% to $768.1 million at December 31, 1996, compared to $675.7 million
at December 31, 1995. The increase in loans was led by residential lending which
increased $85 million since December 31, 1995. The rise in real estate loan
volume was a result of a favorable rate environment, expanded market presence
resulting from the opening of five new banking centers during 1996, and
sustained customer demand for residential financing in the Bank's markets.
Republic also experienced a 44% increase in Home Equity loans as a result of
product enhancements and targeted marketing initiatives implemented during 1996.
The product enhancements included elimination of up-front closing costs and a
six month introductory interest rate.
Republic's commercial real estate loan portfolio declined by 22% to $59 million
at December 31, 1996, due to paydowns and payoffs. Republic is not currently
aggressively pursuing commercial loan business as a result of increased
competition. This competition has generally acted to reduce margins to a point
which management deems undesirable relative to the associated risk factors.
Republic's consumer and Bank card loans, exclusive of Home Equity lines,
remained flat during 1996 at $195 million. The consumer loan portfolio consists
of both secured and unsecured loans. Approximately 41% of loans in the consumer
portfolio are unsecured. During 1995, this portfolio increased substantially as
a result of new programs and products including "All Purpose Loans" and
"Pre-Approved Loans". Republic's "All Purpose Loans", with total outstandings of
$22 million at December 31, 1996 and $27 million at December 31, 1995, are
originated through Republic's banking centers. This product has an average loan
amount of $8,000 and an average percentage rate of 17.54% with a standard
maximum maturity of five years. "Pre-Approved Loans", with total outstandings of
$33 million at December 31, 1996 and $36 million at December 31, 1995, were
delivered through direct mail, targeting customers both in and outside of
Republic's traditional markets. The "Pre-Approved Loan" product has an average
loan amount of $7,800 and an average annual percentage rate of 13.96% with a
standard maximum maturity of five years.
Table 5 - Loans by Type
(in thousands) As of December 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
Real Estate:
Residential $457,204 $371,846 $346,649 $316,824 $297,957
Construction 32,130 31,230 21,919 24,316 10,511
Commercial 59,086 75,648 76,725 45,044 44,352
Commercial 25,115 21,042 18,542 45,522 72,681
Consumer 194,546 175,979 114,993 59,740 41,006
-------- -------- -------- -------- --------
Total Loans $768,081 $675,745 $578,828 $491,446 $466,507
======== ======== ======== ======== ========
The mortgage banking division manages originations, secondary market sales and
servicing of residential loans. This division primarily sells fixed rate
originations in the secondary market without recourse. During 1996, Republic
sold $104 million of residential mortgage loans into the secondary market
compared to $87 million in 1995. At the end of 1996, Republic was servicing $297
million in mortgage loans for other investors compared to $327 million in 1995.
The decline in the mortgage banking servicing portfolio from 1995 to 1996
resulted from management's election to sell a majority of its originations on a
servicing released basis and normal portfolio paydowns.
The table below illustrates Republic's fixed rate maturities and repricing
frequency for the loan portfolio:
Table 6 - Selected Loan Distribution
As of December 31, 1996
One Over One Over
(in thousands) Year Through Five
Total or Five Years
Less Years
Fixed Rate Maturities $193,756 $ 44,781 $100,772 $48,203
Variable Rate Repricing
Frequency 574,325 444,974 129,351
-------- -------- -------- -------
Total $768,081 $489,755 $230,123 $48,203
======== ======== ======== =======
Provision and Allowance for Loan Losses
The allowance for loan losses is regularly evaluated by management and
maintained at a level management believes to be adequate to absorb future loan
losses in the Bank's portfolios. Management continually evaluates the adequacy
of the allowance and makes periodic provisions as needed. The amount of the
provision for loan losses necessary to maintain an adequate allowance is based
upon management's assessment of current economic conditions, analysis of
periodic internal loan reviews, delinquency trends and ratios, changes in the
mixture and levels of the various categories of loans, historical charge-offs,
recoveries, and other information. Management believes that the allowance for
loan losses at December 31, 1996, was adequate. Although management believes it
uses the best information available to make allowance provisions, future
adjustments which could be material may be necessary if management's assumptions
differ from the loan portfolio's actual performance.
The allowance for loan losses increased $2.5 million from December 31, 1995 to
$6.2 million at December 31, 1996. The increase is primarily attributable to
charge-off experience and losses in the unsecured consumer loan portfolio.
Republic's allowance for loan losses to total loan ratio increased from .55% at
December 31, 1995, to .81% at December 31, 1996.
Net charge-offs increased during 1996 to $6.6 million compared to $2.4 million
and $337,000 for 1995 and 1994, respectively. Republic's unsecured consumer loan
portfolio accounted for 96% of total charge-offs for the year ended December 31,
1996. The charge-offs in the unsecured loan portfolio were principally comprised
of $2.8 million in the "All Purpose" program and $2.1 million in the
"Pre-Approved" program (see description of programs under "Loan Portfolio").
This represents a 10% charge-off rate in the "All Purpose" program and 5% in the
"Pre-Approved" program for fiscal 1996. As a result of the increase in
charge-offs, management limited the "Pre-Approved" program to one mailing in the
first quarter of 1996 and improved underwriting. Management also significantly
reduced the volume of the "All Purpose" program by implementing more restrictive
underwriting standards. These actions are intended to improve the average credit
quality of these loan programs. Republic also experienced charge-offs in its
Bank card portfolio of $1.6 million for the year ended December 31, 1996,
compared to $941,000 for the comparable period in 1995. Management anticipates
that charge-offs in the unsecured loan portfolio may continue at or near recent
levels in the near future and believes, based on information presently
available, that it has adequately provided for these losses as of December 31,
1996.
Table 7 - Summary of Loan Loss Experience
Year Ended December 31,
-----------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
Allowance for loan losses:
Balance-beginning of year $3,695 $1,827 $1,627 $1,622 $1,630
Charge-offs:
Real Estate (242) (313) (83) (176) (23)
Commercial (22) (107) (14) (47) (284)
Consumer (6,865) (2,069) (362) (251) (171)
------ ------ ------ ------ ------
Total (7,129) (2,489) (459) (474) (478)
------ ------ ------ ------ ------
Recoveries:
Real Estate 290 22 19 21
Commercial 25 29 165
Consumer 236 42 93 69 40
------ ------ ------ ------ ------
Total 526 89 122 88 226
------ ------ ------ ------ ------
Net charge-offs (6,603) (2,400) (337) (386) (252)
Provision for loan losses 9,149 4,268 537 391 244
------ ------ ------ ------ ------
Allowance for loan losses:
Balance-end of year $6,241 $3,695 $1,827 $1,627 $1,622
====== ====== ====== ====== ======
Ratios:
Percentage of allowance for
loan losses to total loans .81% .55% .32% .33% .35%
Net loans charged off to average
loans outstanding for the period .86% .38% .06% .08% .05%
Allowance for loan losses to
non-performing loans 78% 168% 97% 61% 54%
The following table is management's allocation of the allowance for loan
losses by loan type. Allowance funding and allocation is based on management's
assessment of economic conditions, past loss experience, loan volume, past due
history and other factors. Since these factors are subject to change, the
allocation is not necessarily predictive of future portfolio performance.
Management has accounted for the increase in charge-offs in the unsecured
consumer loan portfolio by increasing the allowance for consumer loans.
Table 8 - Management's Allocation of the Allowance for Loan Losses
As of December 31,
---------------------------------------------------------------------------------------------------------------------
(dollars 1996 1995 1994 1993 1992
in thousands) --------------------- ---------------------- ---------------------- --------------------- ----------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans
Real Estate $1,771 71.4% $957 70.9% $1,091 76.9% $953 78.6% $893 75.6%
Commercial 46 3.3% 34 3.1% 157 3.2% 315 9.3% 439 15.6%
Consumer 4,424 25.3% 2,704 26.0% 579 19.9% 359 12.1% 290 8.8%
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total $6,241 100% $3,695 100% $1,827 100% $1,627 100% $1,622 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ===
Asset Quality
Loans (including impaired loans under SFAS 114 but excluding consumer loans) are
placed on non-accrual status when they become past due 90 days or more as to
principal or interest, unless they are adequately secured and in the process of
collection. When loans are placed on non-accrual status, all unpaid accrued
interest is reversed. These loans remain on non-accrual status until the
borrower demonstrates the ability to remain current or the loan is deemed
uncollectible and is charged off. Consumer loans are not placed on non-accrual
status but are reviewed and charged off no later than 120 days past due. At
December 31, 1996, Republic had $278,000 in consumer loans 90 days or more past
due compared to $361,000 at December 31, 1995.
Table 9 on page 19 provides information related to non-performing assets and
loans 90 days or more past-due. Accruing loans contractually past due 90 days or
more increased from $1.5 million at December 31, 1995, to $5.0 million at
December 31, 1996. This rise is primarily attributable to Republic's secured
residential loan portfolio. These loans are evaluated individually and in those
cases where the underlying collateral is deemed insufficient to satisfy the
obligation, the loan is classified and the allowance is increased accordingly.
Historically, Republic's collateral position on residential loans has been
adequate and has limited the losses to the Bank. Loans in non-accrual status
increased by $2.3 million from December 31, 1995, to December 31, 1996. The
change primarily was the result of one commercial credit relationship which
accounted for $1.7 million of the total increase.
Republic defines impaired loans to be those commercial real estate and
commercial loans greater than $499,999 that management has classified as
doubtful (collection of all amounts due is highly questionable or improbable) or
loss (all or a portion of the loan has been written off or a specific allowance
for loss has been provided). Republic's policy is to charge off all or that
portion of its investment in an impaired loan upon a determination it is
probable the full amount will not be collected. Impaired loans decreased from
$3.6 million at December 31, 1995 to $1.4 million at December 31, 1996.
Table 9 - Non-Performing Assets
As of December 31,
--------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
Loans on non-accrual status(1)(2) $3,055 $742 $1,285 $2,230 $2,283
Loans past due 90 days or more 4,955 1,463 606 421 717
------ ----- ------ ------ ------
Total non-performing loans 8,010 2,205 1,891 2,651 3,000
Other real estate owned 104 552 791 1,023 3,320
------ ------ ------ ------ ------
Total non-performing assets $8,114 $2,757 $2,682 $3,674 $6,320
====== ====== ====== ====== ======
Percentage of non-performing loans
to total loans 1.04% .33% .33% .51% .63%
Percentage of non-performing assets
to total loans 1.06% .41% .46% .75% 1.35%
(1) Loans on non-accrual status is exclusive of impaired loans as such loans
remain on accrual status as of December 31, 1996. See note 4 to the Consolidated
Financial Statements for additional discussion on impaired loans. (2) The
interest income earned and received on non-accrual loans was not material.
Investment Securities
The investment portfolio consists primarily of U.S. Treasury and U.S. Government
Agency Obligations with relatively short maturities. Securities, including those
classified as held to maturity and available for sale, increased from $114.7
million at December 31, 1995, to $281.9 million at December 31, 1996. The
investment portfolio increased as additional securities were purchased with
funds provided by Republic's growth in deposits and repurchase agreements.
During the fourth quarter of 1996, certain maturing securities and new funds
provided by deposit growth were used to purchase "Available for Sale"
securities. The change from previous policy provides Republic with additional
alternatives for managing liquidity requirements.
Table 10 - Investment Securities Held to Maturity
As of December 31, 1996
-----------------------
Average Weighted
(dollars in thousands) Carrying Fair Maturity in Average
Value Value Years Yield
U.S. Treasury and U.S. Government Agencies:
Within one year $69,406 $69,457 .6 5.88%
Over one through five years 84,755 84,753 2.1 6.03%
Over five through ten years 14,636 14,239 5.8 6.43%
Over ten years -- -- -- --
------- -------
Total 168,797 168,449 2.3 6.00%
------- -------
Obligations of states and political subdivision:
Within one year 246 247 .6 6.62%
Over one through five years 773 817 3.5 8.77%
Over five through ten years 700 809 8.9 11.44%
Over ten years 2,739 2,751 15.3 10.01%
------ ------
Total 4,458 4,624 7.2 9.86%
Mortgage-backed securities 663 622 20.5 6.08%
------ ------
Total Investment Securities $173,918 $173,695
======= =======
Table 11 - Investment Securities Available For Sale
As of December 31, 1996
-----------------------
Average Weighted
(dollars in thousands) Carrying Fair Maturity in Average
Value Value Years Yield
U.S. Treasury and U.S. Government Agencies:
Over one through five years $107,937 $107,937 2.2 5.79%
Deposits
Total deposits increased to $783 million at December 31, 1996, compared to $734
million at December 31, 1995. With Republic's increased loan demand, management
actively sought to increase deposits through new products and initiatives.
Republic's certificate of deposit portfolio grew 6.0% through various
promotions, competitive pricing and increased advertising. Republic also
established procedures to improve retention of maturing certificates of deposit.
In addition, Republic has $50.1 million in brokered deposits. The brokered
deposits have stated rates ranging from 5.35% to 6.15% and maturities ranging
from 3 to 5 years.
Republic does not have a large liability dependency ratio as evidenced by the
level of deposit customers with deposits larger than $100,000. The ratio of
those deposits to average earning assets stood at 6.9% at the end of 1996 and
7.1% at the end of 1995. Table 12 provides a maturity distribution of time
deposits $100,000 and over.
Table 12 - Maturity of Time Deposits $100,000 and over
(in thousands) As of December 31, 1996
Three months or less $11,452
Over three months through six months 7,390
Over six months through twelve months 18,250
Over twelve months 23,798
-------
Total $60,890
=======
Short -Term Borrowings
Short-term borrowings consist of repurchase agreements and overnight liabilities
to deposit customers arising from a cash management program offered by Republic.
During 1996, short-term borrowings increased from $21.8 million at December 31,
1995, to $181.6 million at December 31, 1996. Approximately $92 million of the
December 31, 1996, balance represents funds received from a local governmental
organization. Substantially all of these funds received from the governmental
organization will be withdrawn from Republic by March 31, 1997.
Other Borrowed Funds
To the extent that increases in the loan portfolio exceed core deposit growth,
management supplements Republic's funding requirements with other wholesale
funding sources. These sources are primarily the Federal Home Loan Bank, Federal
Reserve, and other regional financial institutions. Other borrowed funds
increased $38.9 million to $107 million at December 31, 1996. The increase was
primarily in borrowings from the Federal Reserve and the Federal Home Loan Bank.
Liquidity
Asset/liability management control is designed to ensure safety and soundness,
maintain liquidity and regulatory capital standards, and achieve an acceptable
net interest margin. Management regularly monitors interest rate and liquidity
risk in relation to prospective market and business conditions and implements
appropriate funding and balance sheet strategies.
Republic's objectives include providing consistent earnings, and preserving an
adequate liquidity position. Republic has access to numerous sources of
additional liquidity if needed. Substantial funding can be realized from the
investment portfolio, of which $40 million matures or is putable within one
year. Republic also has access to $107 million of investment securities which
have been designated as "Available for Sale". Republic's banking centers also
provide access to a broad retail deposit market. Republic has established
additional lines of credit with various financial institutions which can provide
a source for liquidity if needed.
Capital
Regulatory agencies measure capital adequacy within a framework that makes
capital requirements, in part, dependent on the risk profiles of financial
institutions. At December 31, 1996, Republic exceeded the basic regulatory
requirements for Tier I risk based, Tier I leverage and total risked based
capital. The Bank intends to maintain a capital position that meets or exceeds
the "well capitalized" requirements as defined by the FDIC. See Notes to
Financials, page 30, for detailed capital calculations and ratios.
In 1995, Republic issued 50,000 shares of Series A Convertible Preferred Stock
with a stated value of $100 per share and raised $5 million in new capital. At
December 31, 1995, there were 1,203,578 shares of no par common stock issued and
outstanding. On January 8, 1996 the stockholders approved an amendment to
Republic's Articles of Incorporation to authorize 15,000,000 shares of Class A
Common Stock, no par value and 2,000,000 shares of Class B Common Stock, no par
value. On February 16, 1996, the Board of Directors declared a stock dividend of
five shares of Class A Common Stock and one share of Class B Common Stock in
exchange for each share of Common Stock owned by stockholders of record on
February 20, 1996 payable on February 29, 1996. The stock dividend has been
treated as a stock split and all share and earnings per share amounts have been
retroactively restated. The Class A shares are entitled to cash dividend equal
to 110% of the dividend paid per share on the Class B Common Stock. Class A
shares have one vote per share and Class B shares have ten votes per share.
Class B stock may be converted, at the option of the holder, to Class A Common
Stock on a share-for-share basis. The Class A Common Stock is not convertible
into any other class of Republic's capital stock.
Republic maintains a leveraged capital position as a result of management's
emphasis on asset growth. Historically, Republic's earnings have not been
sufficient to support the sustained asset growth. To supplement Republic's
capital position management has utilized alternative capital sources. During the
first quarter of 1997, Republic issued through a newly formed subsidiary,
Republic Capital Trust, $6.4 million in 8.5% Trust Preferred Securities. Each
preferred security, par value $100, can be converted to five shares of Republic
Class A Common Stock. Holders of the Trust Preferred Securities are entitled to
the payments made on Republic's subordinated convertible debentures issued to
that subsidiary which have a thirty year maturity with a right of redemption at
par after five years, subject to certain restrictions. Interest Rate Risk
Management
Republic's policy is to maintain a reasonable balance of rate sensitive assets
and liabilities on a cumulative basis, thus minimizing the interest rate risks
associated with fluctuating market interest rates. At December 31, 1996,
Republic had a one year repricing gap of a negative $2.9 million (see table 13
on page 22) compared to a positive gap of $12.3 million at December 31, 1995.
The change in the one year gap is not considered significant in relation to
Republic's total assets. This one year gap indicates that Republic was
liability-sensitive (i.e. liabilities will reprice faster than assets) during
the period. A rise in interest rates under this liability-sensitive position
could cause earnings and cash flow to decrease. Republic's earnings could be
positively affected by a decrease in rates.
Some degree of interest rate risk is both inherent and appropriate in the
banking industry. The Bank's Board of Directors sets policy guidelines
establishing maximum limits on the Bank's interest rate risk exposure.
Republic's management monitors and adjusts exposure to interest rate
fluctuations as influenced by the Bank's loan and deposit volume. In addition,
the Investment Committee of the Bank monitors Republic's interest rate
sensitivity on a quarterly basis.
Table 13 - Interest Rate Sensitivity (Gap Analysis)
As of December 31, 1996
(in thousands) Total 0-90 91-180 181-365 1-5 5 Years
Days Days Days Years and Over
Interest-Earning Assets:
Loans $768,081 $235,305 $91,557 $175,760 $215,873 $49,586
Investments 287,404 164,331 12,129 21,261 75,221 14,462
Federal Funds Sold 16,650 16,650
---------- -------- -------- -------- -------- ------
Total Interest
Earning Assets $1,072,135 $416,286 $103,686 $197,021 $291,094 $64,048
Interest Bearing Liabilities:
NOW, Super NOW, Money
Market and Savings 131,021 131,021
Other Interest-Bearing
Deposits 585,151 70,415 113,733 140,498 260,505
Repurchase Agreements and
Other Short-Term
Borrowings 181,634 164,019 2,758 9,742 5,090 25
Long-term Debt 106,974 86,000 1,639 19,335
---------- -------- -------- -------- -------- -------
Total Interest
Bearing Liabilities 1,004,780 451,455 116,491 151,879 284,930 25
---------- -------- -------- -------- -------- -------
Total Gap $67,355 ($35,169) ($12,805) $45,142 $6,164 $64,023
========== ========= ======== ======== ======== =======
Cumulative Gap ($35,169) ($47,974) ($2,832) $3,332 $67,355
New Accounting Pronouncements
In June 1996 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities (SFAS No. 125). SFAS No.
125 provides new guidance for determining the circumstances under which
transfers of financial assets are considered sales or financing and extends the
accounting guidance of SFAS No. 122 for accounting for mortgage servicing rights
to all servicing rights and liabilities. Under this standard, accounting for
transfers of financial assets and extinguishments of liabilities is based on
control. After a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered and derecognizes
liabilities when extinguished.
This statement is effective for fiscal years beginning after December 31, 1996
and early adoption is not permitted. The FASB is currently considering a
proposal to delay the implementation date of certain sections of the standard.
The impact of SFAS No. 125 on Republic's financial statements is not considered
to be material.
In March 1997, the accounting requirements for calculating earnings per share
were revised. Basic earnings per share for 1997 and later will be calculated
solely on average common shares outstanding. Diluted earnings per share will
reflect the potential dilution of stock options and other common stock
equivalents. All prior calculations will be restated to be comparable to the new
methods. As Republic has not had significant dilution from stock options, the
new calculation methods will not significantly affect future Basic earnings per
share and diluted earnings per share.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index of Financial Statements
REPORT OF INDEPENDENT AUDITORS 25
REPORT OF INDEPENDENT AUDITORS 26
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996 and 1995 27
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994 28
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996, 1995, and 1994 29
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 30
Notes to Consolidated Financial Statements 31 -51
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
of Republic Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Republic
Bancorp, Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of Republic's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements of Republic
Bancorp, Inc. and subsidiaries as of December 31, 1995, and 1994 were audited by
other auditors whose report dated March 1, 1996 expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Republic Bancorp,
Inc. and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Louisville, Kentucky
January 17, 1997
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of
Republic Bancorp, Inc.
We have audited the consolidated balance sheet of Republic Bancorp, Inc. and
subsidiaries as of December 31, 1995, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1995. These financial statements are the
responsibility of Republic's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Republic Bancorp, Inc. and
subsidiaries as of December 31, 1995, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1995
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Louisville, Kentucky
March 1, 1996
REPUBLIC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
1996 1995
------------ ------------
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 40,021 $ 30,988
Federal funds sold 16,650 44,325
------------ ------------
Total cash and cash equivalents 56,671 75,313
Securities available for sale 107,937
Securities to be held to maturity 173,918 114,654
Mortgage loans held for sale 7,624 5,988
Loans, less allowance for loan losses
of $6,241 (1996) and $3,695 (1995) 759,424 668,193
Federal Home Loan Bank stock 5,548 5,176
Accrued interest receivable 9,685 7,244
Premises and equipment, net 17,509 12,015
Other assets 2,566 2,764
------------ ------------
TOTAL $ 1,140,882 $ 891,347
============ ============
LIABILITIES:
Deposits:
Non-interest bearing $ 66,969 $ 63,304
Interest bearing 716,172 671,139
Securities sold under agreements to repurchase
and other short-term borrowings 181,634 21,729
Other borrowed funds 106,974 68,063
Accrued interest payable 5,643 4,314
Other liabilities 4,471 4,296
------------ ------------
Total liabilities 1,081,863 832,845
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 100,000 shares authorized, Series A 8.5%
noncumulative convertible, 50,000 shares issued and outstanding
(liquidation
preference $5,000) 5,000 5,000
Class A common stock, no par value, 15,000,000 shares
authorized, 6,051,611 shares (1996) and 0 shares (1995) issued and
outstanding; Class B common stock, no par value, 2,000,000 shares
authorized, 1,169,857 shares (1996) and 0 shares (1995) issued and
outstanding; Common stock no par value 0 shares (1996) and 7,221,468
(1995) issued
and outstanding 3,491 3,491
Additional paid-in capital 6,817 6,817
Retained earnings 43,930 43,194
Net unrealized depreciation on securities available
for sale, net of tax of $113. (219)
------------ ------------
Total Stockholders' equity 59,019 58,502
------------ ------------
TOTAL $ 1,140,882 $ 891,347
============ ============
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994(IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
1996 1995 1994
------------- ------------ ------------
INTEREST INCOME:
Loans, including fees $ 70,831 $ 61,338 $ 42,370
Securities:
Taxable 9,375 7,781 3,842
Non-taxable 127 139 405
FHLB dividends 378 338 264
Other 1,275 1,537 494
------------- ------------ ------------
Total interest income 81,986 71,133 47,375
------------- ------------ ------------
INTEREST EXPENSE:
Deposits 36,084 32,512 18,595
Securities sold under agreements to
repurchase and short-term borrowings 3,481 975 653
Other borrowed funds 4,290 4,233 3,265
------------- ------------ ------------
Total interest expense 43,855 37,720 22,513
------------- ------------ ------------
NET INTEREST INCOME 38,131 33,413 24,862
PROVISION FOR LOAN LOSSES 9,149 4,268 537
------------- ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 28,982 29,145 24,325
------------- ------------ ------------
NON-INTEREST INCOME:
Service charges on deposit accounts 2,642 1,974 1,473
Other service charges and fees 445 1,434 782
Bank card services 1,010 1,263 819
Net gain on sale of loans 1,212 1,083 1,625
Loan servicing income 829 895 915
Other 959 871 1,383
------------- ------------ ------------
Total non-interest income 7,097 7,520 6,997
------------- ------------ ------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 13,236 11,334 10,233
Occupancy and equipment 6,623 5,346 4,758
Communication and transportation 1,548 1,407 1,126
Marketing and development 1,620 1,308 896
FDIC Deposit Insurance 3,277 1,245 1,336
Supplies 973 883 702
Litigation recovery - (738) -
Other 4,132 3,720 3,165
------------- ------------ ------------
Total non-interest expense 31,409 24,505 22,216
------------- ------------ ------------
INCOME BEFORE INCOME TAXES 4,670 12,160 9,106
INCOME TAXES 1,943 4,372 2,936
------------ ----------- -----------
NET INCOME $ 2,727 $ 7,788 $ 6,170
============ =========== ==========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ .30 $ .99 $ .86
============= ============ ===========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
COMMON STOCK NET UNREALIZED
------------------------------- ADDITIONAL DEPRECIATION ON TOTAL
PREFERRED STOCK CLASS A CLASS B PAID-IN RETAINED AVAILABLE FOR SALE STOCKHOLDERS'
SHARES AMOUNT SHARES SHARES SHARES AMOUNT CAPITAL EARNINGS SECURITIES EQUITY
BALANCE, January 1, 1994 7,126 $3,437 $6,433 $ 30,799 $ 40,669
Sale of common stock 6 5 43 48
Stock options exercised 48 26 160 186
Purchases and retirements
of common stock (6) (1) (27) (28)
Net income 6,170 6,170
------ ------ ------- -------- --------
BALANCE, December 31, 1994 7,174 3,467 6,609 36,969 47,045
Sale of preferred stock 50 $ 5,000 5,000
Sale of common stock 54 27 279 306
Purchases and retirements
of common stock (6) (3) (71) (74)
Dividends declared:
Preferred($7.28 per share) (364) (364)
Common($.17 per share) (1,199) (1,199)
Net income 7,788 7,788
------- ------- ------ ------ -------- ------- --------
BALANCE, December 31, 1995 50 5,000 7,222 3,491 6,817 43,194 58,502
Stock split 6,018 1,204 (7,222)
Conversions of Class B common
to Class A common 34 (34)
Dividends declared:
Preferred ($8.50 per share) (425) (425)
Common: Class A($. 22 per share) (1,330) (1,330)
Class B($. 20 per share) (236) (236)
Net changes in unrealized
depreciation on securities
available for sale,
net of tax of $113. $ (219) (219)
Net income 2,727 2,727
------- ------- ------- ------ ------ ------ -------- ------- -------- --------
BALANCE, December 31,1996 50 $ 5,000 6,052 1,170 - $3,491 $ 6,817 $43,930 $ (219) $ 59,019
======= ======= ======= ====== ====== ======= ======== ======== ======== ========
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
- --------------------------------------------------------------------------------
1996 1995 1994
OPERATING ACTIVITIES:
Net income $ 2,727 $ 7,788 $ 6,170
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization
of premises and equipment 3,179 2,353 2,024
Amortization and accretion of securities (124) (370) 131
FHLB stock dividends (372) (331) (264)
Provision for loan losses 9,149 4,268 537
Net gain on sale of mortgage loans held for sale (1,212) (1,083) (1,625)
Proceeds from sale of mortgage loans held for sale 104,115 86,808 142,871
Origination of mortgage loans held for sale (104,539) (91,407) (113,249)
Changes in assets and liabilities:
Accrued interest receivable (2,441) (1,968) (1,625)
Other assets 415 960 1,108
Accrued interest payable 1,329 755 1,118
Other liabilities 83 (1,281) (190)
------------- ------------ ------------
Net cash provided by operating activities 12,309 6,492 37,006
INVESTING ACTIVITIES:
Purchases of securities available for sale (108,350)
Purchases of securities to be held to maturity (215,655) (100,039) (103,821)
Proceeds from maturities of securities to be held
to maturity 156,596 86,460 73,190
Purchases of FHLB stock (221)
Net increase in loans (100,484) (101,313) (85,262)
Purchases of premises and equipment (8,673) (2,922) (4,896)
------------- ------------ ------------
Net cash used in investing activities (276,566) (117,814) (121,010)
FINANCING ACTIVITIES:
Net increase in deposits 48,698 144,407 73,165
Net increase (decrease) in securities sold under agree-
ments to repurchase and other short-term borrowings 159,905 8,997 (496)
Payments on other borrowed funds (77,089) (19,997) (23,760)
Proceeds from other borrowed funds 116,000 11,000 33,100
Purchases and retirements of common stock (74) (28)
Sale of common stock and stock options exercised 306 234
Sale of preferred stock 5,000
Dividends (1,899) (1,563)
------------- ------------ ------------
Net cash provided by financing activities 245,615 148,076 82,215
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (18,642) 36,754 (1,789)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 75,313 38,559 40,348
------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 56,671 $ 75,313 $ 38,559
============= ============ ============
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 42,526 $ 36,965 $ 21,395
============= ============ ============
Income taxes $ 2,902 $ 3,920 $ 1,266
============= ============ ============
Transfers from loans to real estate
acquired in settlement of loans $ 104 $ 802 $ 884
============= ============ ============
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BUSINESS - The consolidated financial
statements include the accounts of Republic Bancorp, Inc. (Parent Company)
and its wholly-owned subsidiaries; Republic Bank & Trust Company (Bank),
Republic Mortgage Company and Republic Insurance Agency, Inc. (collectively
Republic). All significant intercompany balances and transactions have been
eliminated.
Republic operates 21 banking centers primarily in the retail banking
industry and conducts its operations predominately in metropolitan
Louisville and in Central and Western Kentucky. Republic's consolidated
results of operations are dependent upon net interest income, which is the
difference between the interest income on interest-earning assets and the
interest expense on interest-bearing liabilities. Principal
interest-earning assets are securities and commercial, real estate mortgage
and consumer loans. Interest-bearing liabilities consist of
interest-bearing deposit accounts and short-term and long-term borrowings.
Other sources of income include fees charged to customers for a variety of
banking services such as credit cards, transaction deposit accounts, and
trust services. Republic also generates revenue from its mortgage banking
activities including the origination and sale of loans in the secondary
market and servicing loans for others.
Republic's operating expenses consist primarily of salaries and employee
benefits, occupancy and equipment expenses, communications and
transportation costs and other general and administrative expenses.
Republic's results of operations are significantly affected by general
economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory agencies.
SECURITIES - Securities to be held to maturity are those which Republic has
the positive intent and ability to hold to maturity and are reported at
cost, adjusted for premiums and discounts that are recognized in interest
income using the interest method over the period to maturity.
Securities available for sale consist of securities not classified as
trading securities nor as held to maturity securities. Unrealized holding
gains and losses, net of tax, on securities available for sale are reported
in a separate component of shareholders' equity until realized. Gains and
losses on the sale of available for sale securities are determined using
the specific-identification method. Premiums and discounts are recognized
in interest income using the interest method over the period to maturity.
Declines in the fair value of individual securities below their cost that
are other than temporary result in write-downs of the individual securities
to their fair value. The related write-downs are included in earnings as
realized losses.
Federal Home Loan Bank stock is not considered a marketable equity security
under Statement of Financial Accounting Standards (SFAS) No. 115
"Accounting for Certain Investments in Debt and Equity Securities" and,
therefore, is carried at cost.
LOANS - Loans receivable that management has the intent and ability to hold
for the foreseeable future or until maturity or pay-off are reported at
their outstanding principal adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans and
unamoritized premiums or discounts on purchased loans.
Interest on loans is computed on the principal balance outstanding. Loan
origination fees and certain direct loan origination costs relating to
successful loan origination efforts are deferred and recognized over the
lives of the related loans as an adjustment to yield.
Generally, the accrual of interest on loans, including loans impaired under
SFAS No. 114, is discontinued when it is determined that the collection of
interest or principal is doubtful, or when a default of interest or
principal has existed for 90 days or more, unless such loan is well secured
and in the process of collection. Interest received on non-accrual loans
generally is either applied against principal or reported as interest
income, according to management's judgment as to the collectibility of
principal. When loans are placed on non-accrual status, all unpaid accrued
interest is reversed. Such loans remain on non-accrual status until the
borrower demonstrates the ability to remain current or the loan is deemed
uncollectible and is charged off. Consumer loans generally are not placed
on non-accrual status but are reviewed periodically and charged off when
deemed uncollectible.
ALLOWANCE FOR LOAN LOSSES - Republic implemented SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan," as amended by SFAS No. 118,
effective January 1, 1995. SFAS 114 defines a loan as "impaired" when it is
probable that a creditor will be unable to collect all principal and
interest due according to the contractual terms of the loan agreement.
Republic has defined its population of impaired loans to be those
commercial real estate and commercial loans $500,000 or greater that
management has classified as doubtful (collection of all amounts due under
the terms of the loan is highly questionable or improbable) or loss (all or
a portion of the loan has been written off or a specific allowance for loss
has been provided). Republic's policy is to charge off all or that portion
of its investment in an impaired loan upon determination that it is
probable the full amount will not be collected.
Impairment of smaller balance, homogeneous loans (commercial real estate
and commercial loans less than $500,000, residential real estate, consumer,
home equity, and credit card loans) is measured on an aggregate basis
giving consideration to historical charge-off experience of the related
portfolios.
Republic recognizes interest income on an impaired loan when earned,
unless the loan is on non-accrual status, in which case interest income
is recognized when received.
The allowance for loan losses is an amount that management believes will be
adequate to absorb losses on existing loans that may become uncollectible,
based on evaluations of the collectibility of loans and prior loan loss
experience. The evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions that may
affect the borrowers' ability to pay. Although management believes it uses
the best information available to make determinations with respect to
Republic's allowance for loan losses, future adjustments, which could be
material, may be necessary if original assumptions differ from actual
performance.
MORTGAGE BANKING ACTIVITIES - Mortgage loans originated and intended for
sale in the secondary market are carried at the lower of aggregate cost or
market value. Republic controls its interest rate risk with respect to
mortgage loans held for sale and loan commitments expected to close by
entering into option agreements to sell loans. The aggregate market value
of mortgage loans held for sale considers the sales prices of such
agreements. Republic also provides currently for any losses on uncovered
commitments to lend or sell.
On January 1, 1996, Republic adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights" which requires an enterprise with mortgage banking
activities to recognize the right to service mortgage loans for others as a
separate asset, however those rights were acquired. Under previous
accounting guidance, a separate asset was recognized for purchased, but not
originated, mortgage servicing rights. Under SFAS No. 122, the total cost
of mortgage loans originated with the intent to sell is allocated between
the servicing right and the loan without the servicing right based on their
relative fair values at the date of origination. The capitalized cost of
servicing rights are amortized in proportion to, and over the period of,
the estimated net servicing income. The mortgage servicing asset is
periodically evaluated for impairment.
Since adoption of this Statement, loans sold in the secondary market have
been primarily servicing released. Accordingly, adoption of SFAS No. 122
has had no material impact on Republic's financial position or results of
operations.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed over
the estimated useful lives of the related assets on the straight-line
method. Estimated lives are 25 to 31 1/2 years for buildings and
improvements, 3 to 5 years for furniture, fixtures and equipment and 3 to 9
years for leasehold improvements.
ACQUISITION INTANGIBLES - The cost in excess of fair value of net assets
acquired in business combinations is amortized to expense on a constant
level yield in direct relation to the estimated remaining lives of
long-term interest bearing assets acquired.
The premium resulting from the valuation of core deposits in business
combinations or in the purchase of branch offices from other financial
institutions is amortized over a period not exceeding the lesser of the
estimated average remaining life of the existing customer deposit base
acquired, or ten years. Amortization is provided at the same rate the
related deposits are expected to be withdrawn. The amortization periods for
intangible assets are continually monitored to determine if events and
circumstances require such periods to be reduced.
IMPAIRMENT OF LONG LIVED ASSETS - Effective January 1, 1996, Republic
adopted SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets",
which requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The effect of adopting this standard is considered
to be a component of other operating expense and was not significant.
LOAN SERVICING - Lo